Kenyan Assets Jolted by Ruling That May Deliver Long-Term Gains

NAIROBI (Capital Markets in Africa) – Short-term pain, long term gain is the prognosis for Kenyan assets after a landmark court ruling that nullified last month’s presidential election and ordered a fresh poll.

Yields on Kenya’s foreign debt climbed the most in almost two months, the shilling weakened and stocks tumbled after the judgment. But for investors willing to look past the immediate political risks, it’s good news, according to JPMorgan Asset Management.

The court upheld an opposition complaint that President Uhuru Kenyatta’s victory was aided by rigging and ordered a new election to be held within 60 days. The decision — unprecedented in Africa — may increase tensions in a country where previous disputed elections have been racked by violence, but it also underlines the independence of the nation’s courts.

“This is a landmark ruling for the region and indicates a stronger and more independent judicial system in Kenya,” said Diana Amoa, an emerging-markets debt portfolio manager at JPMorgan, which oversees about $43 billion of developing-nation bonds. “Strong institutions are usually a positive factor in making long-term investment decisions. That said, today’s decision does prolong uncertainty and shifts focus back to the reaction on the ground for signs of unrest.”

The yield on Kenya’s $2 billion of Eurobonds due June 2024 soared 21 basis points, the most since July 6, to 6.23 percent by 11:39 a.m. in London. The shilling retreated as much as 0.3 percent to 103.23 per dollar before paring the decline. 

The Nairobi Securities Exchange halted trading for 30 minutes after the announcement, spokesman Waithera Mwai said. When the bourse re-opened, the FTSE NSE Kenya 25 Index slumped as much as 6.7 percent, with the biggest company, Safaricom Limited, losing as much as 9.8 percent.

Confidence Boost
“In the short term, we are likely to see the markets weakening as political tension resumes over the next two months,” Faith Mwangi, a Nairobi-based analyst at Exotix Partners LLP, said by email. In the longer term, “this unprecedented ruling gives a much-needed boost of confidence in the system.”

The judgment may add to pressure on government bonds and divert attention from economic challenges at a time when Kenya’s economy is slowing, with revenue collection behind target, according to Standard Chartered Plc. Still, Kenya’s central bank would probably step in to stabilize the currency, said Razia Khan, the London-based chief Africa economist at StanChart.

“The ruling does of course come at a sensitive time for the Kenyan economy,” Khan said . “Longer-term however, the Supreme Court decision will be seen as strengthening Kenya’s institutions, an important step forward for the overall development of the country.”

Other Countries
The ruling may also make investors look differently at other African countries immersed in election disputes, including Zambia, where opposition leader Hakainde Hichilema has filed a lawsuit challenging the ballot that returned President Edgar Lungu to power four months ago.

“Politics is the number one question mark for numerous sub-Saharan countries, so another move in the direction of democratic transparency should be seen as a positive,” said Simon Quijano-Evans, a strategist at Legal & General Investment Management Ltd. in London. “There are bound to be investment cross-reads, for example into Zambia. Democratic transparency is the principal missing piece in the sub-Saharan investment puzzle, so any moves in that direction should be seen as a positive.”

Source: Bloomberg Business News